Introduction of“Green Premium”

Over the past several years, we’ve been making the case that we have to eliminate global carbon emissions. To avoid the worst effects of climate change, we need new zero-carbon ways to generate electricity, grow food, make things, move around, and keep warm and cool.

Understanding the answers to these questions will help us make sure we’re putting our best minds and resources on the toughest problems in climate and energy. In my view it boils down to one issue: What is the difference in cost between a product that involves emitting carbon and an alternative that doesn’t? This difference in cost is what I call the Green Premium, and understanding it is key to making progress on climate change. (It is also a central idea in my book about climate change, which will come out in February.)

Here’s an example of a Green Premium: The average retail price for a gallon of jet fuel in the United States over the past few years has been around $2.22, while advanced biofuels for jets cost around $5.35 per gallon. The Green Premium is the difference between the two, which is $3.13, or an increase of more than 140 percent.

Since airlines would not be willing to pay more than twice as much to fuel their planes—and many customers would balk at the resulting increase in air fares—the Green Premium on biofuels suggests that we need to find ways to either make them cheaper or make jet fuel more expensive. Or a combination of the two.

Unfortunately, calculating Green Premiums is not an exact science. It involves making assumptions about the cost of emerging technologies, for example, that well-informed people can disagree about. It is also important to note that one reason the Green Premiums exist is that the prices of fossil fuels don’t factor in the damage they inflict by making the planet warmer. In many cases, clean alternatives appear more expensive because fossil fuels are artificially cheap.

For one thing, they help us measure our progress toward eliminating carbon emissions. The bigger a Green Premium is—especially for lower-income countries like India and Nigeria whose energy needs are growing—the further we are from a zero-carbon future.

They also serve as a guide to action. In cases where the Green Premiums are big, we know we need innovations that will close the price gap. In cases where they’re small—or where clean products are actually cheaper than the polluting version—it suggests that something other than the cost is keeping zero-carbon products from being deployed, and we need to understand why.

As a rule, there are three levers we can pull to reduce Green Premiums:

Governments can use policies to either make the carbon-based version of something more expensive, or make the clean version cheaper—or, ideally, some of both. This could include requiring a certain amount of electricity or fuel to be generated in zero-carbon ways.

Companies and investors can commit to buying and using cleaner alternatives, investing in research and development, supporting clean-energy entrepreneurs and startups, and advocating for helpful government policies.

Individuals can help create markets for better, cleaner alternatives. When you buy an electric vehicle or a plant-based burger even though it costs more than the alternative, you’re saying to the companies that make these products: “There’s demand for these items. Make more and we’ll buy them.” That will drive investment in research, which helps decrease the price and ultimately makes clean products more affordable and available for everyone.